Endeavour Silver Corp. (NYSE:EXK)
2013 Denver Gold Forum
September 24, 2013 6:40 pm ET
Bradford Cooke - Chief Executive Officer
Mike Parkin - Desjardins Securities
Mike Parkin - Desjardins Securities
Next up we have Endeavour Silver Corp. with Bradford Cooke, Founder and CEO, here to give us the story. In the interest of time, I'll pass it over.
Thank you very much, Mike, and welcome to this presentation of Endeavour. My slide is an attempt to portray that there is in fact light at the end of the tunnel, having had a very interesting first half of the year in the gold and silver sector. We had a great first half for Endeavour. We had another year of record operating performance and we're on track to deliver our ninth consecutive year of accretive growth. I will be making some forward-looking statements during my presentation, so you are duly cautioned.
Then by way of introduction, Endeavour is a company I founded some nine years ago. It's a mid tier silver miner focused on accretive growth to drive value for stockholders. Our core assets are the three high-grade underground silver-gold mines in Mexico and one emerging new discovery also in Mexico.
Our expertise is two-fold. It's in taking troubled mines in historic districts and turning them from losing money to making money, that's playing to our operational excellence, and also applying our exploration expertise to literally make new discoveries on an almost annual basis in these historic districts and drive annual growth, pure organic growth. So our near term goal very simply is to continue our pace of growth in Endeavour from the mid tier and into the senior tier and build a premier silver senior producer in the next three years through continued organic growth and strategic acquisitions.
Our core assets are the, first mine, Guanacevi in Durango State, second mine, Bolanitos in Guanajuato State, and our recently acquired El Cubo mine we bought about 13 months ago, kitty-cornered to Bolanitos in the same district of Guanajuato. I'll only touch on one exploration project in this presentation. It's the emerging new discovery at San Sebastian on the West Coast of Jalisco State.
So from time to time, we make strategic acquisitions, three in the history of the Company, Guanacevi in 2004, Bolanitos in 2007, and El Cubo in 2012. In the interim, between those acquisitions, we focus on those two aspects of our business model, turning around struggling operations to make more and more money, and then looking to the discovery cycle to drive resource, reserve and ultimately production growth. So let's have a look at that growth.
We've enjoyed a 49% compound annual growth rate of our total reserve and resource growth, a pure organic growth through the drill bit from 2004 through 2012, and that drives our consistent production growth averaging 41% compound annual growth rate 2004 to 2012. As you can see from this slide, our projected year end guidance is a great leap forward for the Company which provides guidance of 6 million ounces of silver production this year and silver equivalent production of about 10 million ounces.
Of course that kind of consistent production growth drives very strong financial performance. We build our business by growing our revenues per share every year and we are on track to do that again this year. We grow our cash flow per share and we're on track to do that again this year. And we have historically grown our adjusted earnings per share. This year we're not forecasting that because of the lower metal prices, but we are expecting a much better second half compared to the first half.
And last but not least, cash cost net of our by-product gold credit, when you buy a troubled mine in a historic district like we did for Bolanitos in 2007, your cost spike up to a $9.5 range, and then through our operating expertise we drive those costs down, bottoming in the $5 range in 2011, and also in 2012 by the way, but 2012 we bought El Cubo in July and so it single-handedly dragged our consolidated cash cost to the $7 range and $10 range earlier this year. I'm happy to say that the cash cost profile has tipped over and we do expect now to see declining cash cost for all three mines going forward.
Our response to metal prices, lower metal prices in the first half of this year, very simply we decided that as a small and nimble company with only 12 people in head office, we needed to move and move quickly to cut costs. A lot of the cost cutting was discretionary. So we reduced our capital budget by 25%, we have only $7 million left to spend in the second half, we reduced our exploration budget by 20%, we only have $2 million left to spend in the second half, and we reduced our G&A budget by 10%.
We were able to put the foot on the accelerator at Bolanitos and dramatically expand our production in the first half by 35% over budget in order to increase cash flow. That's simply a function of our having previously invested in accelerated mine development where we were well over two years ahead of the mine plan and so we were able to boost our cash flow during times of low metal prices by pumping up the production at Bolanitos.
That allowed us to largely cover our fairly large CapEx spend at El Cubo where we have completely rebuilt the El Cubo plant in seven months start to finish on time under budget. We have also miraculously in the last three months been able to reduce our El Cubo workforce by 38% from 984 employees to 612, and it's still declining. But it has not impaired our production profile. In fact, we have through accelerating our operational turnaround at El Cubo seen our production grades almost double from the date of purchase in July of 2012 to today.
In fact in the first half, the production grades averaged 180 grams silver equivalents per tonne at El Cubo and in July and August alone they were running 220 grams. The reserve grades were up in the 260 range. So there is still room for improvement. That's the next year of operational improvement. What does all this do to our cash cost structure? We do expect slightly lower cost in Q3, there are some one-time severance costs that will hit the bottom line in Q3, and the majority of our progress in cost cutting will show up in the bottom line in Q4.
So our outlook for the second half is that all that cost cutting should significantly reduce cash cost in the second half of 2013, and this graph is simply modeling our Q2 production and cost cutting. The blue line has an embedded gold credit in it. That's why it has a slope to it. And at $22 silver, you can see that we are now forecasting sub $8 cash cost. The red line is all-in sustaining operating cost and we would at $22 silver project something in the order of $15 all-in.
The green line is simply our EBITDA line and you can see that at $20 silver, we'll barely make $50 million in EBITDA, but at $30 silver, we'll make $150 million in EBITDA. In other words, we are leveraged $10 million of EBITDA per $1 move in the price of silver at a 60-to-1 gold-silver ratio. So a pretty significant improvement forecast for the second half.
Our mines continued to outperform in the first half and that allowed us to boost our guidance by 20% on silver and 46% on gold, now guiding 6 million ounces of silver and 68,000 ounces of gold for the year, very significant jump over our original guidance in January.
Market snapshot. Our shares do continue to lag our peer group. We unfortunately took on let's call it an El Cubo discount after the acquisition of El Cubo last year. Let's face it, the asset had a lousy reputation on the street and it was struggling to survive. It was a money loser. We've turned the corner on El Cubo. We are now making money at El Cubo and we believe that is sustainable, and now it's just a question of how fast we can move to make it a significant cash provider to our balance sheet.
A quick tour of the assets. Guanacevi is the top five historic Mexican district. We have 4,000 hectares there and three mines feeding a central plant, 1,200 tonne plant. The main takeaway on Guanacevi is that it is now our steady-state mine at 2.5 million ounces a year, and our main goal here is to grow it but simply to continue extending the mine life through additional discoveries and mine developments, the most recent discovery of which is our Milache find from last year and we want to take a development decision on it by the end of next year so it can see early production by 2015.
Moving on to Bolanitos, our second and fastest growing mine, it's in the second largest historic Mexican district of Guanajuato, and that Bolanitos property is shown in red. Our newly acquired El Cubo mine last year is in the same district. Those properties are shown in blue. And the main takeaway on Bolanitos is that it's not only overproducing 2.5 million ounces of silver this year, we think there is significant upside here both in the reserve and the resource growth and also in production growth. I'll try and show you a bit of that.
We spent five years exploring, fast tracking development of and putting into production five parallel ore bodies in the Lucero mine area. All of the ovals on this map are the other areas remaining as exploration targets. We have just gotten into the La Luz-Plateros-Asuncion in Bolanitos North districts or subareas this year and we have already announced three interesting drill discoveries in the La Luz, Plateros and Asuncion veins. More drilling to come on those but we believe they will be ore bodies and minable.
Just by way of context, that approximately 1 kilometer long area around the Lucero mine with five parallel ore bodies, that's 24 million ounces of resources and reserves in that one little area. So each oval I think has pretty significant exploration potential for us in the future.
Moving on to El Cubo, it's also a great fit for Endeavour. Obviously, if you have one mine in a district, two is a good fit. We picked up 8,000 hectares of producing and exploration lands. At El Cubo, we immediately had to make a difference in the site because it was losing money, and so we used Bolanitos as our model for the turnaround.
Suffice to say that on this chart, the rising black line is our quarterly silver production at Bolanitos from Q3 2007 to Q3 2009. We more than doubled the production over that period. At the same time, the cash cost at Bolanitos spiked to $32 an ounce in Q4 of 2007, but by Q3 of 2009, they were negative cash cost, and they have remained negative all the way up until the first half of this year. So it's a very significant gold credit and it has historically covered all of the cost around that entire operation.
How are we doing at El Cubo? The rising blue line was our spike in quarterly silver production in the first four quarters of operations, you see the dip in Q2 that was scheduled due to downtime in the plant during the CapEx reconstruction program, and we fully expect Q3 to be back up to the top of the chart. Now what we're looking for is a rising obviously silver production profile until it reaches the plant capacity.
The cash cost profile is the spiky green line peaking at $37 an ounce I believe and getting down to $15 in the second quarter, back to the low $30s in the third quarter because of the downtime in the plant, and we fully expect that Q3 numbers will show us back below $20 on El Cubo. We would be modeling teens next year, in the long-term single-digit cash cost at El Cubo.
So how was our one year report card at El Cubo? We had quite a number of – a list of things to do. We needed to have an immediate impact on safety. This was a brutally underperforming mine when we took it over and we have successfully reduced last time accidents by 75% over the first 12 months of operations. Now there were two strikes in three years at this mine under the previous owner, we have managed to skate through the year-end wage negotiation, the annual profit sharing negotiation, and a 40% reduction in the workforce with no strikes. Needless to say the relationship with the union is much better than it was.
We have rebuilt the plant, as I mentioned, on time below budget. We initiated a new mine plant to develop larger and higher grade chunkier reserve blocks where you can get multiple crews and multiple pieces of equipment working. Now that's far easy to supervise, it's far more productive than the old style. Hunt and peck mining is what we had ended up buying back a year ago.
We have managed to more than double the production grades simply by reducing dilution and getting out of low grade unproductive areas and into larger higher grade areas. And all of that has an impact on costs, so we have seen the cash costs coming down and we expect that to continue over the second half of this two year turnaround program.
A quick snapshot on our CapEx program, just to remind you what our team actually accomplished, and this was done largely in house with one EPCM contractor and a Mexican construction company. Seven months start to finish, $34 million budget for the plant, it came out at $28 million.
And last but not least, each and every one of these mines are not just turnaround candidates, they are exploration opportunities, and we feel that at El Cubo, the northern half of the 9 kilometer long property has supported a 160 years of production history, the southern half barely have been drilled. Same veins [outcropping] for kilometers and they have barely been drilled. Each oval on this map is approximately 1 kilometer long. Each oval if we find – if we are 50% successful at identifying ore over those respective targets, that would support – each target would support a 5 million to 10 million ounce silver equivalent target. So, a very significant upside for us at El Cubo.
And finishing off on the assets with our emerging new discovery at San Sebastian on the West Coast of Jalisco State, it's a famous historic district that shut down in 1910, nothing happened for 100 years until we came along and drilled the Terronera Vein. Our initial resource, 31 million ounces of silver, 200,000 ounces of gold, it's wide open, it's thick, it's rich. It is easily comparable to Bolanitos except it is thicker. It is running 6 to 8 meters thick. And the 600 gram meter interval is what you see here in red. Almost the entire resource lies within that 600 gram meter contour.
Moving then to how do we stack up against our peers? I mentioned that we've been dragged down by this El Cubo discount in the last year. That means that on a price-to-cash flow and to a certain extent on a price-to-earnings basis, we're cheap, we're still cheap, and we expect that to correct itself over the next year. By enterprise value per ounce of production or per ounce of resource, we're kind of cheapish to middle of the pack. That's a function of our short mine lives.
So finishing up, where do we go from here? Well, management now has a clear idea of how we can grow this business 60% over the next three years from 6 million ounces of silver to 10 million ounces of silver production, from 10 million ounces of silver equivalent production to 16 million ounces of silver production. The bulk of that 75% lies in developing San Sebastian and continuing to turn around and then expand El Cubo, capture another expansion opportunity at Bolanitos, and simply continuing to optimize Guanacevi. So that's what we see in our future and you'll see more details of that coming over the next four quarters.
So why Endeavour? Very simply, we have a very experienced Board and management team who have established our own proven track record for growth, eight consecutive, now nine consecutive years of accretive growth, by building out of tired old mines in historic districts quality assets through strategic acquisitions and compelling organic growth. The stock has good liquidity on New York and Toronto, strong financially, and we are a pure silver-gold player. Thank you very much.
Mike Parkin - Desjardins Securities
We have time for a couple of questions. Maybe I'll ask one. On San Sebastian, it certainly looks like the grades are quite encouraging there. What's the average thickness on that deposit?
It's averaging 6 to 8 meters depending on where you are. We'll take it down to 2 meters but we've had [indiscernible] is up to 16 meters.
Mike Parkin - Desjardins Securities
Okay. Any questions from the audience? Alright, well, please join me in thanking.
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